A.

Rent Controls: In this case , we assume two scenarios

1. Black Market present in the market
2. Without Black Market

With Black Market

Definition:

Price Ceiling: A price ceiling keeps a price from rising above a certain level.Charging a price
higher than the ceiling price is ‘illegal’.

Black Market:Economic activity that takes place outside government-sanctioned channels.

Black market transactions usually occur “under the table” to let participants avoid
government price controls or taxes.

In this case, we are assuming that Black Market is available in the market. At Price P1, Qs=Qd.
So, in equilibrium, the Price is P1 & the Quantity is Q1. Now, Govt. has imposed rent control.
Due to the rent controlling, the new price is P2. In that case, the new quantity demand is Q2,
whereas the quantity supply is Q3. Due to the lower supply rather than demand, there is shortage
in the market. Here, Q2 is not feasible as no one is going to fulfill the huge demand at lower
price. So the shortage will be Q1 & Q3. As the supply has been decreased, tenant is willing to
pay at price P3. In the Black Market, the new price will be P3 along with the new demand Q3.
Here, owners show the P2 as their collecting price but they will charge P3 for their actual
transaction. So, the gap between P2 and P3 will be the Black Market Price. Now, we will show
whether Dead Weighted Loss will occur or not due to the Govt. intervention. Because of the
Govt. rent controlling, there will be underproduction. When there is underproduction, the triangle
before equilibrium point is Dead Weighted Loss.

Before Rent Control

Consumer Surplus (CS) = 1+2+5

[Area under demand curve DD and above the price line P1]

Producer Surplus (PS) = 3+4+6

[Area under the price line P1 and above the supply curve SS]

Total Surplus (CS + PS) = 1+2+5+3+4+6

After Rent Control

Consumer Surplus (CS’) = 1

[Area under demand curve DD and above Black Market price line P3]

Producer Surplus (PS’) = 2+3+4

[Area under Black Market price line P1 and above the supply curve SS]

Total Surplus (TS’= CS’ + PS’) = 1+2+3+4

Now Change in Consumer Surplus

∆CS= CS’ – CS

= 1-1-2-5

= -2-5
Change in Producer Surplus

∆PS= PS’ – PS

= 2+3+4-3-4-6

= 2-6

Total Change= ∆CS

+∆PS

= -2-5

+ 2-6

[(-2, +2) Redistributed Area]

= -5-6

Dead Weighted Loss= -5-6

So the area number 5 and 6 are Dead Weighted Loss.

Comments:In this case, Consumer/Tenants will bear the heaviest cost.. There are fewer
apartments supplied in the market at High price P3, so Tenants are lose out by renting at high
price and producers lose out by not renting out apartments. This is the dead-weight loss triangle
(DWL) in the graph. Tenants were supposed to pay rents at Price P2 but now they have to pay at
price P3. So they are paying extra amount of P2-P3.Also if we see the Change in consumer
surplus, there are loss of area 2 and 5. And Change in producer surplus gain of area 2 and loss of
area 6. Here area 2 is moving from tenants to house owners. So tenants is losing more.
Without black market

In this case, we assume that there is no Black Market exists, which means all are agree with the
price ceiling set by the government. At equilibrium point, the Price is P1 & Quantity is Q1.
When govt. intervenes thorough rent controlling, new price will be P2 along with the new
quantity demand Q2 and quantity supply Q3. As the Qd is greater than Qs, there must be
shortage in the market. Even though the supply decreased, the price will not go up as there is no
Black Market. So, there is underproduction as quantity decreased from Q1 to Q2 and there will
be Dead Weighted Loss.

Before Rent Control

Consumer Surplus (CS)= 1+2+5

[Area under demand curve DD and above the price line P1]

Producer Surplus (PS) = 3+4+6

[Area under the price line P1 and above the supply curve SS]

Total Surplus (CS + PS) = 1+2+5+3+4+6

After Rent Control

Consumer Surplus (CS’) = 1+2+3

[Area under demand curve DD and above price line P2]

Producer Surplus (PS’) = 4

[Area under price line P2 and above the supply curve SS]

Total Surplus (TS’= CS’ + PS’) = 1+2+3+4

Now Change in Consumer Surplus

∆CS= CS’ – CS

= 1+2+3-(1+2+5)

= 3-5

Change in Producer Surplus

∆PS= PS’ – PS

= 4-(3+4+5)

= -3-6

Total Change= ∆CS

+∆PS

= 3-5

-3-6

[(+3, -3) Redistributed Area]

= -5-6

Dead Weighted Loss= -5-6

So the area number 5 and 6 are Dead Weighted

Comments: In this case,who will bears the heaviest cost,Depends. There are fewer apartments
supplied in the market at this lower price P2, so both consumers and producers lose out by not
renting out apartments. This is the dead-weight loss triangle (DWL) in the graph. Those
consumers who manage to find an apartment at this lower price gain because they now pay a
price P2 lower than before, so their consumer surplus goes up (CS). Owners are the clear losers.
They rent out fewer apartments and the producer surplus in the economy goes down (PS).
Definition of subsidy to tenant:

A subsidy is a benefit given to an individual, business or institution, usually by the government.

It is usually in the form of a cash payment or a tax reduction. The subsidy is typically given to
remove some type of burden, and it is often considered to be in the overall interest of the public,
given to promote a social good or an economic policy. We are discussing about the subsidy
given by the Government for the Tenants.

In this Graph at price OP1 total quantity is OQ1 and at price OP2 total quantity is OQ2. In
OQ2, OQ3 is the demand of Tenants and Q3-Q2 is the Government demands.

Before subsidy
Consumer Surplus

(CS)= (area under DD and above P1)

=1+2+3
Producer Surplus

(PS)= (area under p1 and above SS)

=4+5

After subsidy

Consumer Surplus (CS’) = (area under DD’ and above P2)

=1+10

Producer Surplus

PS’= (area under P2 and above SS)

=2+3+4+5+9

Changing Consumer Surplus

∆CS= CS’-CS

=1+10-1-2-3

=-2-3+10

Changing Producer Surplus

∆PS= Ps’-PS

=2+3+4+5+9-4-5

=2+3+9

∆w (change in welfare) = ∆CS+∆PS-Cost of the government

= (-2-3+10) + (2+3+9)-(3+5+6+7+8+9)

=-2-3+10+2+3+9-3-5-6-7-8-9

=10-3-5-6-7-8
If area of 10 is greater than area of (-3-5-6-7-8) then there is no dead weighted loss. So social
gain is attained and government bears the lowest portion of the cost.

If the area of 10 is less than the area of (-3-5-6-7-8) then there is dead weighted loss and for that
government cost is higher than consumer.

Government gives this Subsidy to support the Tenants even though it creates dead weighted Loss
because it’s a targeted approach. If targeted group is benefited this project will continue. Here in
the Graph point 9 is the gain for tenants so government will continue the project.

C.

Consumer Surplus (CS)= 1+2

Producer surplus (PS) =3+4

Total=1+2+3+4
CS’ =1+2+3+6+7

PS’=3+6+7

∆ CS+∆ PS = 3+6+7+2+5

=2+3+5+6+7+8

Now cost of the Government P2 P3= AB

And total quantity =0q2=BC

Total cost= AB*BC=ABCD

=2+3+5+6+7+8

Dead weighted loss= Total cost – Change in surplus on welfare

=(2+3+5+6+7+8)-2-3-5-6-7
=8